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FASB's Credit Losses Proposal Causes Concern

posted by Sharon Bahr
on Mon, 03/11/2013 - 10:57am

There is growing anxiety about the Financial Accounting Standards Board’s (FASB) proposal regarding financial reporting of expected credit losses on loans and other financial assets. The proposed model would utilize a single “expected loss” measurement for the recognition of credit losses; this would replace the multiple existing impairment models in U.S. generally accepted accounting principles (GAAP) that primarily use an “incurred loss” approach.

Under the proposal, a credit union would estimate the cash flows that it does not expect to collect, using all available information, including historical experience and forecasts about the future. The proposed approach— referred to as the CECL (current expected credit loss) model— considers more forward-looking information than is currently permitted under GAAP.

Credit unions have voiced concerns regarding the potential impact of this proposal, including that it could cause a doubling of an entity’s credit impairment allowance. In addition, there is concern that the proposed “expected loss” approach would require use of speculative forecasting of the performance of an asset over the remainder of the asset’s life.

During the Governmental Affairs Conference (GAC), the Credit Union National Association's (CUNA) Accounting Subcommittee held an in-person meeting that included guests from the industry as well as the National Credit Union Administration (NCUA) to discuss this and other issues. In addition, in the coming weeks, CUNA will be meeting with a member of FASB to discuss credit unions’ concerns with and questions about the proposal.

FASB is accepting public comments on the proposal until April 30, 2013; and CUNA will be circulating their draft comment letter by the end of this month. CUNA’s Regulatory Comment Call is available here.